2018 (5) TMI 1148 - HC - Income Tax

TDS u/s 194C OR 194J - disallowance of Channel Placement Fee - tds liability - disallowance u/s. 40(a)(ia) - Held that - The amendment by introduction of Explanation 6 to Section 9(1)(vi) of the Act took place in the year 2012 with retrospective effect from 1976. This could not be have been contemplated by the Respondent when he made the payment which was subject to tax deduction at source under Section 194C during the subject Assessment Year, would require deduction under Section 194J of the Act due to some future amendment with retrospective effect. As under Section 40(a)(i) under which the expenditure has been disallowed by the Revenue, meaning of royalty as defined therein, is that as provided in Explanation 2 to Section 9(1)(vi) of the Act and not Explanation 6 to Section 9(1)(vi) of the Act. Thus, the disallowance of expenditure under Section 40(a)(i) of the Act can only be if the payment is 'Royalty' in terms of Explanation 2 to Section 9 (1)(vi) of the Act. Undisputedly, the payment made for channel placement as a fee, is not royalty in terms of Explanation 2 to Section 9(1)(vi) of the Act. Therefore, no disallowance of expenditure under Section 40(a)(vi) of the Act, can be made in the present facts - Decided in favour of assessee Whether Channel Placement Fee is not in the nature of royalty u/s. 9(1)(vi) and so the tax is not required to be deducted u/s. 194J of the I.T. Act ? - Held that - In view of the appeal not being entertained on question (a), as pointed out herein above, the issue raised in question(b) becomes academic. This is so, as irrespective of the nature of payment made in the present facts, no expenditure can be disallowed under Section 40(a)(i) of the Act in respect of fee paid for Channel Placement.

Summary

Issues:
1. Whether the disallowance of Channel Placement Fee can be made under Section 40(a)(ia) of the Income Tax Act when tax was deducted under Section 194C instead of Section 194J?
2. Whether the Channel Placement Fee is in the nature of royalty under Section 9(1)(vi) and if the tax deduction under Section 194J is required despite Explanation 6?

Analysis:
1. Re Question (a):
(a) The Respondent paid a channel placement fee to cable operators during the Assessment Year, deducting tax at 2% under Section 194C. The Assessing Officer disallowed the expenditure of Rs. 7.18 Crores under Section 40(a)(ia) for not deducting tax under Section 194J, considering the payment as royalty under Explanation 6 to Section 9(1)(vii).
(b) The Dispute Resolution Panel (DRP) upheld the Respondent's objections, stating that tax deduction under Section 194C was appropriate as the payment did not fall under royalty as defined in Section 9(1)(vi).
(c) The Tribunal, following a previous decision, ruled that the Respondent was not liable to deduct tax at higher rates due to a retrospective amendment. The Court cited the legal maxim "lex non cogit ad impossibilia" to support the decision.
(d) The retrospective amendment introducing Explanation 6 to Section 9(1)(vi) in 2012, effective from 1976, could not have been foreseen by the Respondent during the payment, justifying the lower tax deduction under Section 194C.
(e) The Court clarified that for disallowance under Section 40(a)(i), the payment must meet the definition of royalty in Explanation 2 to Section 9(1)(vi), which was not the case for the channel placement fee. Hence, no disallowance was warranted.
(f) As per the reading of Section 40(a)(i), no substantial question of law arose, leading to the non-entertainment of Question (a).

2. Re Question (b):
(a) Since Question (a) was not entertained, the issue raised in Question (b) became academic. Regardless of the nature of payment, no expenditure could be disallowed under Section 40(a)(i) for the channel placement fee.
(b) Therefore, Question (b) was deemed academic in these circumstances, not giving rise to any substantial question of law and hence not entertained.

In conclusion, the Appeal was dismissed with no order as to costs.